Eurozone Crisis

Mark Hoban Excerpts

Tuesday 15th November 2011 Westminster Hall

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

I congratulate my hon. Friend the Member for Basildon and Billericay (Mr Baron) on securing the debate.

Let me be absolutely clear: it is in our vital national interest that eurozone states reach a coherent, comprehensive and lasting solution. First and foremost, they must implement the agreement reached towards the end of October, which involves a three-pronged strategy to recapitalise the European banks, resolve the situation regarding Greek debt and reinforce the EFSF to create a firewall between Greece and other vulnerable euro area countries. The new Governments in Greece and Italy need to show that they can implement the tough measures required to deal with their debts and make their economies more competitive. Uncertainty in the eurozone is undermining not just their economies, but ours. A return to stability in the eurozone will benefit our economy, whereas continued uncertainty will harm it. My hon. Friends the Members for Cities of London and Westminster (Mark Field) and for Wimbledon (Stephen Hammond) made that point.

We have a clear interest in greater certainty in the eurozone, but at no point have we committed, or will we commit, any British taxpayers’ money to a special purpose vehicle, or through the EFSF or the ESM, either directly or through the EU budget.

[Mr Baron]

If I may be so bold, the Financial Secretary is coming up with the economic clap-trap that we must all save the euro. Does he accept that binding divergent economies into a single currency without fiscal union was and remains a massive mistake? It is as simple as that. The world will not fall apart if the euro breaks up, and countries such as Norway and Switzerland have proved that by trading with the eurozone using their own currencies.

[Mr Hoban]

My hon. Friend is absolutely right, which is why we did not join the euro in the first place. The remorseless logic of monetary union, as he said in his speech, is fiscal union. Fiscal union is necessary for monetary union to work. That is what we are seeing throughout the globe, and that is why we said that eurozone members must make greater progress towards fiscal union.

[Mr Baron]

If the Financial Secretary accepts the logic about the deficiency of the euro, are the Government joining in the chorus that we must all come together and save the euro?

[Mr Hoban]

As I have said, uncertainty and problems in the eurozone have a damaging impact on the UK economy and have a chain effect on what is happening here in the UK. It is not in our economic interest for that to continue. Just last week, John Cridland, director-general of the CBI, commented on the negative impact that the problems in the eurozone are having on the UK economy. We are an open economy and our European partners are our largest trading partner, so it is in our interest to ensure that the eurozone works. That will be of huge benefit to the UK economy.

--- Later in debate ---

[Graham Stringer]

(Blackley and Broughton) (Lab) rose—

[Mr Hoban]

I would like to make some progress. Let me address UK commitments through the IMF, which is the centrepiece of this debate. In a carefully worded statement, the hon. Member for Nottingham East (Chris Leslie) covered Labour’s retreat on its IMF policy. He was bravely leading his troops through the No Lobby in July without the support of the architects of the G20 London deal. The former Prime Minister and the former Chancellor were not there. What has happened? Last week, his boss, the shadow Chancellor, cut his legs from under him by saying that

“the Labour party supports an increase in the UK’s International Monetary Fund subscription”.

I do not think the hon. Gentleman is in a position to lecture anyone about consistency and principle.

As a founding and permanent member of the IMF, and as one of its largest shareholders, we continue to be a strong supporter of its role as a global backstop to the world economy. Currently, 53 countries are being supported by the IMF, of which only three—Greece, Ireland and Portugal—are in the euro area.

[Mr Baron]

Will the Financial Secretary give way?

[Mr Hoban]

Let me continue. As a founding member of the IMF, we recognise its important role in stabilising the global economy in times such as this. That is why we participated on the nine previous occasions when its quota was increased. In these turbulent times, it is essential for confidence and economic stability that the IMF has the necessary resources, and there may well be a case for further increases. At the G20 two weekends ago, Britain, the US, China and all the other countries round the table made it clear that in principle we are willing to have an increase in IMF resources to boost global confidence. We stand ready to contribute within limits agreed by the House and set out in the International Monetary Fund Act 1979. That limit, denominated in the IMF’s units of account—special drawing rights—stands at 38.8 billion SDRs, or about £38.3 billion pounds.

Let me remind the House that no one who has lent money to the IMF has ever lost that money. The money goes directly to the IMF and not to individual countries. It is one of the most creditworthy institutions in the world, and its loans are afforded preferred creditor status, which means that they are first in line to be repaid, even if not all other creditors are paid. Consequently, no country has ever lost money as a consequence of lending to it.

There has been no agreement about the timing, extent or exact method through which IMF resources will be increased, but an immediate need is to implement existing plans to increase its resources. Let me make clear how IMF resources will be used. Any increase must be available to all its members and not reserved for use only by the euro area. There can be no hypothecation, and money is lent to the IMF, not to specific countries.

The use of IMF resources is linked to the question of the need for economic reform. All hon. Members recognise the need for the euro area to reach a comprehensive resolution to the crisis, and clearly it is for the euro area to resolve that crisis. That resolution cannot be simply through recapitalisation of banks, the creation of a euro area bail-out fund or resolving the problems in Greece.

[Mr Baron]

Will the Financial Secretary give way?

[Mr Hoban]

Perhaps my hon. Friend will be patient. There are areas where the eurozone needs to tackle its competitiveness to respond to those issues. There is the question whether IMF money is conditional on structural reform to improve competitiveness. The answer is yes, because conditions are built into IMF programmes to ensure that competitiveness changes take place. Portugal, for example, has an extensive programme of privatisation, and the Portuguese Government’s right to be involved in private companies must be abolished. In Ireland, legislation has been passed to increase the state pension age to provide a significant boost to long-term fiscal stability. In Greece, the Government are discussing breaking the link between the national minimum wage and the annual inflation rate, and market reform is being promoted to allow businesses to set wages independently of collective agreements.

[Mr Carswell]

Will the Financial Secretary give way?

[Mr Hoban]

Let me continue. I have only three minutes left, and I want to ensure that I address as many of my hon. Friends’ questions as possible.

We are seeing structural reform to improve the competitiveness of economies hand in hand with IMF programmes. I hope that that will reassure my hon. Friends that reform is taking place in those countries to ensure that they meet their international obligations.

[Mr Baron]

Returning to a previous point, I suggest that the reason why the eurozone crisis is causing a bit of a problem over here is that existing policy is making the situation worse. Denying devaluation is forcing greater austerity packages on populations that are already trying to pare down their debt. That is the problem that the Government do not see.

May I take my hon. Friend back to devaluation? The Government make great play of the fact that only three of the 53 packages go to the eurozone. Can he name one programme outside the eurozone where a country cannot devalue?

[Martin Caton (in the Chair)]

Order. That was a long intervention.

[Mr Hoban]

My hon. Friend seems to believe that devaluation is necessary to restore economic growth. That is not the case. Ireland is a country that cannot devalue, but a consequence of how it implemented its reform programmes is that in quarter 2 growth increased by 1.6%, with a 2.3% increase year on year. That demonstrates that devaluation is not necessary to improve a country’s competitive position, for it to earn its way out of problems or for it to grow. Devaluation may make life easier, but it is not impossible for an economy to grow, even if currency devaluation is not possible. In September, the troika concluded that the programme is on track and remains well financed. In Ireland, the authorities are implementing a programme policy.

In the euro area, we are seeing programmes to restore competitiveness, but those reforms must be made throughout the eurozone, if the eurozone is to strengthen and help to underpin economic growth in the UK. No request has been received as yet for additional resources from the IMF, but the role that it can play in underpinning global economic stability is important, and this is an opportunity that the UK should consider if we are to resolve some of the problems in the wider global economy, tackle the fragility and, by definition, improve stability in the UK.